The multifamily housing sector in 2024 is grappling with a 7.1% increase in total operating expenses, as well as a surge in new unit supply. This situation is compounded by rising insurance premiums, escalated borrowing costs, and rising operating costs, all of which are creating significant challenges for investors and depleting NOI.

Escalating Expenses and Insurance Costs

Operating expenses for multifamily properties have surged by 7.1%, with a notable driver being a 27.7% increase in insurance premiums year-over-year as of January 2024. RealPage data reveals that property insurance costs per unit in the 50 largest metro areas have more than doubled since the pandemic began.

Depleting Net Operating Income and Rising Delinquency Risk

The growth of net operating income (NOI) has decelerated sharply, achieving only a 2.8% increase in Q1 2024 compared to a robust 24.8% in late 2021. This slowdown in NOI growth, coupled with rising operating expenses, has heightened the risk of loan delinquencies within the multifamily sector. However, the current delinquency rates remain below the peak levels seen during the Great Recession.

Impact of Higher Borrowing Costs and Capitalization Rates

Investors with variable rate or short-term loans maturing soon are facing higher borrowing costs and lower property values due to increasing capitalization rates. The 30-day delinquency rate for Commercial Mortgage-Backed Securities (CMBS) loans has risen for six consecutive quarters, reaching 4.3% in Q4 2023. While CMBS loans constitute a small share of multifamily loans, the recent increase in delinquency rates is notable.

Supply-Demand Imbalance and its Effects on Rent Growth

Despite strong demand from renter households, with an increase of 514,000 in 2023, the supply of new multifamily units has outpaced demand. This imbalance has pushed the national rental vacancy rate to 6.5% in Q1 2024, leading to a slowdown in rent growth. Rent growth has decelerated to 0.2% year-over-year in early 2024, a significant drop from the peak of over 15% annually in early 2022.

The multifamily housing sector is navigating a challenging landscape marked by rising operating expenses, increased borrowing costs, and a supply-demand imbalance. Investors must carefully consider these factors as they impact short-term and long-term investment strategies. Addressing these challenges will require a nuanced approach, balancing cost management with strategic investment in areas showing resilient demand.

Monitoring your property’s Net Operating Income (NOI) and other financial metrics can be challenging, but it doesn’t have to be. If you want to know the current value of your multifamily investment property, contact us for a broker’s opinion of value.

Don’t let inaction stop you from staying informed about your property’s performance. We’ll make the process simple and provide regular updates on your property’s value as often as you need.

Source: GLOBEST.COM